Many countries are already experiencing Bear Markets.  Soon, others will follow...

So much for the chearleaders that said that recovery is arriving… For sure we are having a “hot” summer.

Treasury yields tumble to 70-year low…

The benchmark borrowing costs of Germany and the UK also fell to multi-decade or even record lows while stock markets plunged globally on weak US data.

And CDS in sacro-saint  Germany are 10+ up !!!

Who said that summers are borring ¿?¿?¿?

Courtesy of ZERO HEDGE

“As both Italian and Spanish bond spreads continue slowly creeping wider toward the half a century territory, we are reminded once again that once both countries pass 450 bps, LCH will automatically hike collateral triggers for both countries, in essence initiating another waterfall effect whereby less cash is released upon repo, requiring more bonds to be pledged, which in turn means other assets have to be sold off to make up for the shortfall, which in turn leads to a sell off of the underlying financial institution (recall that banks in Europe buy their nation’s sovereign debt and immediately pledge it back via various repo mechanisms) and so on. What this practically means is that the bond vigilantes now have a far more achievable task in terms of endgoals when it comes to punishing the offending debt, in this case Italy and Spain. Expect a prompt move to this appropriate level as debt holders start panicking what an extra margin demand will mean for them, and in turn try to lock up cash at current repo levels.

As a reminder, from May 5, 2011 Dow Jones:

LONDON (Dow Jones)–Clearing house LCH.Clearnet said Thursday it is raising the extra margin it requires for positions in Irish government bonds cleared through its RepoClear service.

 

Back in October, the clearing house said it would generally consider a spread of 450 basis points over the 10-year AAA benchmark to be indicative of additional sovereign risk, meaning it may materially increase the margin required for positions in that issuer.”

Translation: price, or as the case may be, yield, target.”

Important letter from Bill Gross explaining the Real debt problem in US

http://www.pimco.com/EN/Insights/Pages/Kings-of-the-Wild-Frontier.aspx

​ “Over the years we’ve had some fun together – killin some ‘bars,’ drinkin moonshine – some even in these chambers. (Whiskey that is – the ‘bars’ I’ve seen once or twice, but only when I was plum drunk). But the time for funnin is over. They’ll be no jokes from David Crockett today.”

Davy Crockett Speech to Congress, 1830

Figurative coonskin cap on head, I echo the sentiments of Davy Crockett – Indian fighter, Alamo defender and Tennessee Congressman – not necessarily in that chronological order. The debt ceiling may have been raised and the palpable sighs of relief heard across global financial markets, but the fun times are over. They’ll be no jokes from Bill Gross today, nor across this land for years to come I suspect. Even though the U.S. has managed to avert a debt crisis and perhaps a ratings downgrade, there remains a stain on our reputation, a scarlet “A” for budgetary “Abuse,” that will not disappear. The whole world was watching, and what they saw was a dysfunctional government taking its country to the financial precipice and backing off at the very last moment. “Shades of a Banana Republic,” as former Reagan budget director David Stockman opined somewhat harshly last week. We may not be Greece just yet, but Mr. Stockman is looking in the right direction.

Nothing in the Congressional compromise reached over the weekend makes a significant dent in our $1.5 trillion deficit. “Out year” fantasies, as opposed to “current year” realities, is an apt description of the spending cuts that characterize this compromise. The Office of Management and Budget (OMB) estimates that future deficits will be reduced at most by .5%, and if so, it would be welcomed, but that .5% comes with no new taxes and a continuation of the belief that we don’t have to pay for our trespasses. Like many a Banana Republic, we may one day be invoking the Lord’s Prayer, pleading – “Forgive us our debts, as we forgive our debtors,” yet at the same time looking towards the heavens á la Saint Augustine with a fervent “let me be chaste, but let it be tomorrow.”

Treasury Secretary Tim Geithner noted last week that it would be unthinkable that the U.S. would not meet its obligations on time. Now that the timeliness has temporarily been put aside, an investor must logically ask how we will meet our obligations, and how much they really are. In addition to an existing nearly $10 trillion of outstanding Treasury debt, the U.S. has a near-unfathomable $66 trillion of future liabilities at “net present cost.” As shown in the following table from a Mary Meeker “USA Inc.” study, and validated by the Department of Treasury and Congressional Budget Office (CBO) calculations, the combined present cost “payment due” from Medicaid, Medicare and Social Security is over six times our current obligations of Treasury debt. The press and most professional investors are accustomed to measuring “paper” debt as opposed to walking/living liabilities in the form of people. I call these liabilities “debt men walking” because as long as 330 million living Americans require promised entitlements – the $66 trillion that wear shoes are as much of a liability as the $10 trillion on paper.

Admittedly, as Meeker’s table (Figure 1) points out, we can address these liabilities by improving the efficiency of our healthcare system, reducing benefits, raising retirement ages, increasing tax rates or a combination of all of the above. We likely will. So reduce that $66 trillion if you care to, but the subjective remainder still hangs over financial markets like a Damocles sword. How will we meet these obligations as Secretary Geithner asked?

Aside from the unthinkable outright default, there are numerous ways that a government – especially a AAA rated one – can employ to reduce its future liabilities. Highlighted below are the prominent tools that can significantly affect investor pocketbooks:

1. Balance the budget and/or grow out of it
2. Unexpected inflation
3. Currency depreciation
4. Financial repression via low/negative real interest rates

Let me address each of them in brief:

1. Balance the budget/growth – The current Congressional compromise is but one small step for fiscal solvency. There is no giant leap for mankind anywhere on the horizon. Trillions of further spending cuts, and yes trillions of tax hikes, are necessary to stabilize our “official” debt/GDP ratio of 90% or so. One important detail to keep in mind: projected deficits in 2012 and 2013 of 7-8% of GDP rely on OMB growth estimates of 3%+ in the next few years. Recent trends give pause to these estimates as does PIMCO’s New Normal, which believes 2% not 3% is closer to reality. If so, deficits move right back up to near-double-digit percentages of GDP. Likewise, should interest rates ever rise from current 2% average levels, a 100 basis point increase raises the deficit by 1% and erases any hoped for gains. Sisyphus would be familiar with this seemingly unsolvable dilemma.
2. Unexpected inflation – While markets are global these days, figures sometimes lie and policymakers often figure. Focusing investors’ attention on statistics emphasizing “core” or “chain-linked” methodologies can entice investors to stay home, or in the case of foreign nations, to “invest American.” Central bankers, not just in the U.S., but the U.K., have long been arguing for a reversion of headline 3% CPI numbers to the 2% or lower “core” standard expectation. “Patience,” they argue, but “prudence” might be the better watchword. If so, then the expected “unexpected” inflation would mimic the old Roman custom of coin shaving or its substitution with base metals instead of silver or gold. Inflation is the result no matter how you coin it, which puts more money in government coffers to pay their bills and less money in your pocket to pay yours.
3. Currency depreciation – High deficits, both fiscal and trade, combined with low interest rates for extended periods of time produce declining currency valuations against more prosperous, and more policy conservative competitor nations. Few Americans are aware that the dollar’s recent 12-month depreciation of over 15% is an explicit tax on their standard of living. Uncle Sam, the government overseer, benefits enormously: one rather clever way for the U.S. to pay its bills to foreign creditors is to pay them in depreciated dollars. The Chinese and other offshore holders wind up getting not only .05% interest on their Treasury Bills, but 12 months later – voila! – their Bills are worth only 85 cents on the dollar in global purchasing power. The Chinese should be reading Shakespeare, not Confucius – especially the second half of “neither a borrower nor a lender be,” when it comes to U.S. dollars.
4. Financial Repression via low/negative real interest rates – I have commented on this Carmen Reinhart, commonsensical technique in prior Outlooks. If the Treasury is borrowing money from you or PIMCO at .05% for the next six months and CPI inflation is averaging 3%, then lenders/savers are being shortchanged beyond even rather egregious historical examples. The burden of “sixteen tons” of debt á la Tennessee Ernie Ford is considerably reduced at 5 basis points of annual interest. “Loading” coal or debt in this case at near 0% yields doesn’t make the borrower another day older, nor deeper in debt. Actually it’s a shot of Botox for the borrower, but a shot of lead for the lender. Duck!

By using these four life rafts available to U.S. and other AAA sovereign borrowers, one can almost imagine a half century from now, that they remain solvent – although chastened perhaps with a lower credit rating. Based on historical example at Moody’s and Standard & Poors, it just might take 50 years for them to downgrade U.S. credit, but be that as it may, you and PIMCO as savers and savings intermediaries can take precautionary or even retaliatory measures to preserve purchasing power. Favor countries with cleaner “dirty shirts” and higher real interest rates: Canada, Mexico, Brazil and Germany come to mind. Shade equity and fixed income investments away from dollar based indexes towards those of developing nations with stronger growth prospects. Purchase commodity based real assets before reserve surplus nations do. And above all, don’t be lulled to sleep by Congressional law makers that promise a change in Washington. The last change I believed in was on Election Day 2008, and that turned out to be more fiction than reality. Davy Crockett, where are you? You may have been drinkin’ whiskey in those Congressional Chambers and those “bars” may have been half fiction, but you were a coonskin hero of a forgotten age, a hero the likes of which we have yet to see in 21st century Washington. We’re stuck with the new Kings and Queens of a wilder frontier.”

William H. Gross
Managing Director

Summer and its doldrums are becoming very present in EU. Germany, Italy and Spain under fire…

let´s see if the  ” Political Elite ” can bring another Bail out as soon as possible !!! Last one lasted 5 days.

Courtesy of Ron Paul

Default Now, Or Suffer A More Expensive Crisis Later

” Debate over the debt ceiling has reached a fever pitch in recent weeks, with each side trying to outdo the other in a game of political chicken. If you believe some of the things that are being written, the world will come to an end if the U.S. defaults on even the tiniest portion of its debt.

In strict terms, the default being discussed will occur if the U.S. fails to meet its debt obligations, through failure to pay either interest or principal due a bondholder. Proponents of raising the debt ceiling claim that a default on Aug. 2 is unprecedented and will result in calamity (never mind that this is simply an arbitrary date, easily changed, marking a congressional recess). My expectations of such a scenario are more sanguine.

The U.S. government defaulted at least three times on its obligations during the 20th century.

– In 1934, the government banned ownership of gold and eliminated the right to exchange gold certificates for gold coins. It then immediately revalued gold from $20.67 per troy ounce to $35, thus devaluing the dollar holdings of all Americans by 40 percent.

– From 1934 to 1968, the federal government continued to issue and redeem silver certificates, notes that circulated as legal tender that could be redeemed for silver coins or silver bars. In 1968, Congress unilaterally reneged on this obligation, too.

– From 1934 to 1971, foreign governments were permitted by the U.S. government to exchange their dollars for gold through the gold window. In 1971, President Richard Nixon severed this final link between the dollar and gold by closing the gold window, thus in effect defaulting once again on a debt obligation of the U.S. government.

Unlimited Spending

No longer constrained by any sort of commodity backing, the federal government was now free to engage in almost unlimited fiscal profligacy, the only check on its spending being the market’s appetite for Treasury debt. Despite the defaults in 1934, 1968 and 1971, world markets have been only too willing to purchase Treasury debt and thereby fund the government’s deficit spending. If these major defaults didn’t result in decreased investor appetite for U.S. obligations, I see no reason why defaulting on a small amount of debt this August would cause any major changes.

The national debt now stands at just over $14 trillion, while net total liabilities are estimated at over $200 trillion. The government is insolvent, as there is no way that this massive sum of liabilities can ever be paid off. Successive Congresses and administrations have shown absolutely no restraint when it comes to the budget process, and the idea that either of the two parties is serious about getting our fiscal house in order is laughable.

Boom and Bust

The Austrian School’s theory of the business cycle describes how loose central bank monetary policy causes booms and busts: It drives down interest rates below the market rate, lowering the cost of borrowing; encourages malinvestment; and causes economic miscalculation as resources are diverted from the highest value use as reflected in true consumer preferences. Loose monetary policy caused the dot-com bubble and the housing bubble, and now is causing the government debt bubble.

For far too long, the Federal Reserve’s monetary policy and quantitative easing have kept interest rates artificially low, enabling the government to drastically increase its spending by funding its profligacy through new debt whose service costs were lower than they otherwise would have been.

Neither Republicans nor Democrats sought to end this gravy train, with one party prioritizing war spending and the other prioritizing welfare spending, and with both supporting both types of spending. But now, with the end of the second round of quantitative easing, the federal funds rate at the zero bound, and the debt limit maxed out, Congress finds itself in a real quandary.

Hard Decisions

It isn’t too late to return to fiscal sanity. We could start by canceling out the debt held by the Federal Reserve, which would clear $1.6 trillion under the debt ceiling. Or we could cut trillions of dollars in spending by bringing our troops home from overseas, making gradual reforms to Social Security and Medicare, and bringing the federal government back within the limits envisioned by the Constitution. Yet no one is willing to step up to the plate and make the hard decisions that are necessary. Everyone wants to kick the can down the road and believe that deficit spending can continue unabated.

Unless major changes are made today, the U.S. will default on its debt sooner or later, and it is certainly preferable that it be sooner rather than later.

If the government defaults on its debt now, the consequences undoubtedly will be painful in the short term. The loss of its AAA rating will raise the cost of issuing new debt, but this is not altogether a bad thing. Higher borrowing costs will ensure that the government cannot continue the same old spending policies. Budgets will have to be brought into balance (as the cost of servicing debt will be so expensive as to preclude future debt financing of government operations), so hopefully, in the long term, the government will return to sound financial footing.

Raising the Ceiling

The alternative to defaulting now is to keep increasing the debt ceiling, keep spending like a drunken sailor, and hope that the default comes after we die. A future default won’t take the form of a missed payment, but rather will come through hyperinflation. The already incestuous relationship between the Federal Reserve and the Treasury will grow even closer as the Fed begins to purchase debt directly from the Treasury and monetizes debt on a scale that makes QE2 look like a drop in the bucket. Imagine the societal breakdown of Weimar Germany, but in a country five times as large. That is what we face if we do not come to terms with our debt problem immediately.

Default will be painful, but it is all but inevitable for a country as heavily indebted as the U.S. Just as pumping money into the system to combat a recession only ensures an unsustainable economic boom and a future recession worse than the first, so too does continuously raising the debt ceiling only forestall the day of reckoning and ensure that, when it comes, it will be cataclysmic.

We have a choice: default now and take our medicine, or put it off as long as possible, when the effects will be much worse.”

Long time no write… After a few days seeing the unfolding of the European tragedy and EU political elite behind the curve,  yesterday we had a reality check from the Markets. €´s mess ¿?¿?

Courtesy of Daily Capitalist.

Italy is the world’s eighth largest economy and it has one of the highest levels of public debt-to-GDP in Europe:

Greece is ranked the 28^th largest economy in the world. By comparison Ireland is ranked 36^th.

Needless to say, Italy represents a flash point in the euro zone as bond vigilantes have gone after it for the past two days. Fear is contagious as they say. Greece is the ostensible problem and the stated reason for today’s EU emergency meeting, but they will discuss Italy. Italy’s debt costs are still relatively low, but the Bund spread is growing and their cost of debt relative to the amount of debt (primary balance) is a problem.

Is this something we here in Fortress America should worry about? Yes.

As Goes Greece, So Goes …

Contagion is the big fear in the euro zone. If Greece defaults on its sovereign obligations that lends credibility to an unwinding of the euro because German and French taxpayers will ultimately and reluctantly foot that bill. That is because the biggest lenders to Greece are German and French banks, and like us, they would sacrifice a stance against moral hazard before they will see their banks fail (bailouts).

There is no way Greece can pay back its debt to the European Financial Stability [Bailout] Fund or its other creditors in our lifetimes. And it is unlikely that they will be able to muster the courage to significantly cut back the large public trough and liberalize their economy in order to make repayment happen. Today the EU ministers agreed to “enhance the €440 billion [bailout fund's] flexibility and scope,” which really means they will allow the €440 billion fund to buy Greek bonds on the secondary markets, thereby bailing out the banks. It will take the vote of each country to allow them to do this, so it’s not a fait accompli … yet. But it is easy to visualize creditor banks lining up at the fund window, Greek bonds in hand. Also, it is likely they will restructure Greek bailout debt with longer maturities. This will amount to a default as far as the rating agencies are concerned. The markets will react negatively, and money will flow into Treasurys.

Bund spreads are high and sovereign rates on PIIGS have been climbing.

Yesterday (Tuesday)10-year yields on Greek, Portuguese, Irish, Spanish and Italian debt fell sharply which means the ECB intervened in the market to allay fears. But, they can’t do that long enough to keep the vigilantes away.

Italy Isn’t Greece

As the world’s eighth largest economy, Italy’s problems are Europe’s problems, and Europe’s problems are our problems. About 16% of our exports go to Europe. The more the euro zone is roiled with default problems, the more hot money will flow here and ultimately increase the dollar versus the euro. While your European vacation will be cheaper, exporters to Europe will take a hit.

What are Italy’s problems? The aforementioned sovereign debt as 120% of GDP is a problem in a socialist country whose economic growth has been flat for the past 10 years–less than 0.25% vs. 1.1% for the EU.  Q1 growth was 0.1% versus the euro zone’s 0.8%. The government has been doing what all governments do: buying votes with social welfare benefits. If they don’t have the money, the don’t stop spending, they borrow and spend. Nothing new there. In fact, the Romans invented the practice going way back to the days of the Republic. The debt is mostly (75%) owned by Italian banks, and the short-term roll-over is relatively modest:

But the “modest” amount is more problematic that it would look. They will probably get through 2011, with a little help from euro zone friends, but with a declining economy and a poor economic future, rising borrowing costs could leave them little room to maneuver.

Like Greece, the rest of the EU is demanding Italy cut spending and bring their budget in line with reality. Berlusconi has proposed a €43 billion austerity package, and the opposition was quick to agree to do it with “‘very few’” amendments to the budget plan in order to speed the bill’s passage.” I wonder what “very few” really means. His administration’s hold on power is tenuous.

Reforms include  increased retirement age, public-sector wage freezes, simplified tax structure, and fewer transfers of funds from the central state to local administrations. In fairness, their budget deficit “shrank to 4.6% of GDP in 2010 from 5.4% the previous year, the lowest level among euro zone countries after Germany and well below the euro zone average of 6%.”

And what after that ¿?¿?¿?

From Reuters: “The cost of insuring Greek government debt against default rose to a record high of 1,600 basis points on Monday, hit by concerns that any second rescue of Greece will trigger a credit event or at least multi-notch rating downgrade of its debt. Five-year credit default swaps (CDS) on Greek government debt rose 58 bps on the day to 1,600 bps, according to data monitor Markit.  The Markit iTraxx index of western European sovereign CDS was up 9 bps on the day at 220 bps, near a record high of 221 bps hit on January 10. Portuguese CDS were up 40 bps at 773 bps, while Irish CDS were 33 bps higher at 745 bps, both at record highs. Spanish CDS were up 13 bps at 289 bps.”

Congratulations Political “Elite” for helping so much in finding answers !!!

Let´s see what happens with the Support for IBEX and the resistance for the 10 Y Bono.

With € under pressure and Greece looking very week, we are not sure that Spain can handle the storm.

By FT: